Devon has now turned into a Pure E&P company
and its stock price needs to catch up quickly to its peers in the sector.
An E&P company is involved in the high-risk/high-reward area of exploration and production focus on finding, augmenting, producing and merchandising different types of oil and gas.
Peers of Devon in this sector are trading at much, much higher Forward PE multiples. The reason for this is because Devon basically overnight has transformed itself into an E&P company through the sale of its natural gas assets in Canada and six natural gas plants for ~$3B to Canadian Natural Resources (CNQ) and the purchase late last year of $6 billion worth of oil and gas assets at the Eagle Ford shale to expand its presence there. Devon Energy is hoping this new investment in the Eagle Ford shale, will give the company a production boost when combined with the Permian Basin. It has already seen this happen in Q4, as its production has soared 17% to a new company record.
Since the announcement of the sale of its assets in Canada to Canadian Natural Resources (CNQ), analysts have been jumping over each other to raise near term Price Targets to $80/shr.
Devon at $80/shr would have a forward PE of just 12.68 for FY15, which is well below the multiples that its peers are getting for FY15 currently. The new Devon Energy has a lot of catching up to do with respect to valuation metrics. Such is the case with major developments that affect the entire company earnings structure as follows:
#1 The Turnaround in Devon Shares has started with the Feb. 28th Acquisition of Eagle Ford Assets from GeoSouthern Energy.
OKLAHOMA CITY--(BUSINESS WIRE)--Feb. 28, 2014-- Devon Energy Corporation (NYSE:DVN) today completed its previously announced acquisition of Eagle Ford assets from GeoSouthern Energy. Devon has acquired 82,000 net acres located in DeWitt and Lavaca counties in Texas. This world-class light-oil position is delivering outstanding well results offering some of the highest rate-of-return drilling opportunities in North America.
“Our Eagle Ford acquisition is one of several bold steps we have recently taken to upgrade our portfolio and improve the growth trajectory and profitability of our business,” said John Richels, president and chief executive officer.
“We were able to acquire these premier Eagle Ford assets at a price well below our current EBITDA multiple, resulting in immediate accretion to Devon shareholders on virtually every metric, including cash flow per debt-adjusted share.” Devon plans to invest approximately $1.1 billion in the Eagle Ford this year and will drill more than 200 wells. For its 10 months of ownership in the play this year, the company’s net production is expected to average between 70,000 and 80,000 barrels of oil equivalent per day. With the majority of Devon’s Eagle Ford acreage derisked, this opportunity provides low-risk, repeatable oil growth for years to come.
#2 Devon Energy Completed the Sale of Canadian Conventional Assets on April 2nd.
OKLAHOMA CITY--(BUSINESS WIRE)--Apr. 2, 2014-- Devon Energy Corporation (NYSE:DVN) today announced that it has completed the Sale of its Canadian conventional assets to Canadian Natural Resources Limited (CNQ) for C$3.125 billion. The company’s retained Canadian business will consist of its thermal heavy oil, Lloydminster and Horn River assets.
The company plans to repatriate the proceeds to the U.S. for use in the repayment of debt incurred to finance its Eagle Ford acquisition. The company expects net proceeds of US$2.7 billion after adjusting for currency exchange and taxes associated with the sale and repatriation of the funds to the U.S.
The divestiture process for the company’s remaining non-core properties in the U.S. is ongoing. Devon expects to open data rooms for these U.S. assets in the second quarter and complete these divestitures by year end.
Don't be surprised to find Devon trading North of $90/shr during the course of 2014, especially if its 200 anticipated Eagle Ford Wells start producing with EOG like production rates. EOG disclosed recently that 5 of its recently drilled wells are producing 13,000 barrels of oil per day. That is $1.3 Million Dollars per day with oil at $100 from those 5 wells alone. Note oil is today trading at $103/barrel prior to the summer driving season, and when you combine that with Russia keeping up the pressure on Ukraine, the price of Oil will only continue higher from its current price.